ADP Testing Question

[Guest facade]

Scenario: Calendar year Non-Safe harbor 401(k). All HCE deferred. Prorata employer allocation method. All contributions are made for the same allocation/plan year.

HCE1

HCE2

HCE3

ADP testing is performed in January. Test is failed and a refund to HCE3 is used to correct. HCE3 is not eligible for catch up contributions. Money is distributed from the plan.

In September employer makes a profit sharing contribution. Allocation to HCE1 and HCE2 exceeds 415 limitations. A portion of their deferrals equal to the 415 excess contributions are then recharacterized as catch up contributions to solve the 415 violation. Because the deferrals to HCE1 & HCE2 are now lower, the plan no longer fails ADP testing and no correction is called for.

The plan has to test early to avoid penalties on the excess deferrals but once all contributions are made there turns out to be no excess deferrals so the correction to HCE3 was not necessary. So what do you do?

[rcline46]

Common misconception. There IS an ADP failure and the distribution is correct.

Later you deliberately overallocate a PSP contribution to force catch ups. If those HCEs had not been eligible for catch ups, you would have had to distribute the excess deferrals (probably - according to the document). These are completely separate transactions.

Now the regulations do not clearly state which test you do first!

So if you allocated the PSP first to force the catch ups, and THEN did the ADP test, there would not have been a failure.

Are we having fun yet?